Merkel backs Europe-wide growth pact

French President Francois Hollande, left, welcomes German Chancellor Angela Merkel at the Elysee Palace, Wednesday, June 27, 2012. Germany's Chancellor Angela Merkel says she hopes European leaders adopt a €130 billion ($162 billion) stimulus package this week, in a gesture to French President Fran

/ AP

French President Francois Hollande, left, welcomes German Chancellor Angela Merkel at the Elysee Palace, Wednesday, June 27, 2012. Germany's Chancellor Angela Merkel says she hopes European leaders adopt a €130 billion ($162 billion) stimulus package this week, in a gesture to French President Francois Hollande despite their differences over how to end Europe's spiraling debt crisis. The two leaders went into talks Wednesday night sharply opposed over whether to share debt among the 17 nations that use the euro, and how much sovereignty to surrender over national budgets. (AP Photo/Michel Euler)

French President Francois Hollande, left, welcomes German Chancellor Angela Merkel at the Elysee Palace, Wednesday, June 27, 2012. Germany's Chancellor Angela Merkel says she hopes European leaders adopt a €130 billion ($162 billion) stimulus package this week, in a gesture to French President Francois Hollande despite their differences over how to end Europe's spiraling debt crisis. The two leaders went into talks Wednesday night sharply opposed over whether to share debt among the 17 nations that use the euro, and how much sovereignty to surrender over national budgets. (AP Photo/Michel Euler) (/ AP)

ANGELA CHARLTON and GEIR MOULSON, Associated Press

Germany's Chancellor Angela Merkel rallied Wednesday for a (EURO)130 billion ($162 billion) Europe-wide stimulus package in a gesture to French President Francois Hollande - but the two leaders remained at odds over the bigger, tougher steps needed to end Europe's spiraling debt crisis.

The so-called "growth pact" was the only obvious area of agreement as Hollande and Merkel went into talks Wednesday night meant to set the stage for a closely watched summit of European Union leaders in Brussels on Thursday and Friday.

Earlier in the day, Merkel brushed aside the latest push to pool European debt, arguing that it would be "economically wrong and counterproductive" before governments have shown they can comply with budget rules.

Pressure has been mounting on Germany from the other leading economies in the eurozone to soften its opposition to joinly issued eurobonds or other forms of debt pooling.

Hollande, who won election last month campaigning against austerity policies championed by Merkel, has pushed for the (EURO)130 billion stimulus package and smiled broadly when Merkel, standing stiffly at his side, offered her endorsement.

"We have made progress toward a pact for growth, which we hope can be decided tomorrow. We will then talk about the political future of the economic and currency union," said Merkel.

Amid increasing fears that the eurozone could break up, both the German and French leaders said Wednesday they want "more Europe" - meaning closer union among European countries.

But they disagree on how to get there: Merkel wants strong political union first, with centralized control of national budgets, before considering eurobonds or other financial integration.

Hollande's aides say EU leaders need to decide on some short-term measures right away, such as a banking union with a single authority.

In his brief remarks with Merkel, Hollande said he wants "to deepen the economic and monetary union, and then political."

Though eurobonds could reduce borrowing costs for eurozone strugglers, like Spain and Italy, they could increase them for Germany and some others. Berlin worries about being liable for other countries' debts without being able to ensure that they push through economic reforms.

Top European officials have drawn up a plan ahead of the summit, which starts Thursday, that proposes a "medium term" move toward eurobonds, as well as the creation of a banking union. They also called for the 17 euro countries to surrender more control over their national budgets, in an apparent nod to German concerns.

Speaking to Germany's Parliament, Merkel made clear that wasn't enough. She argued that the plan called for pooling debt first "and only second - and then very imprecisely - are more control and enforceable obligations named."

"I fear that, at this summit, there will again be much too much talk about all sorts of ideas for common liability and much too little about improved controls and structural measures," she said.

"Quite apart from the fact that instruments such as eurobonds, euro bills, debt redemption funds and many others are constitutionally impossible in Germany, I consider them economically wrong and counterproductive," Merkel added.

She said that "supervision and liability must go hand in hand," and only when sufficient supervision is ensured could any such measures be considered.

Facing criticism of her austerity-led approach to resolving the crisis, Merkel has talked increasingly of fostering economic growth over recent months.

But she has stuck firmly to her insistence that Europe must tackle its relative uncompetitiveness and heavy debts in a step-by-step process - and that it can't make its problems go away in one stroke.

On Wednesday, she opened her speech by dismissing expectations that the EU summit Thursday and Friday would bring the crisis to an end.

"Because I know the expectations and hopes that are pinned on this summit, I will repeat right at the start what cannot be said often enough," Merkel said. "There is no quick solution and no simple solution. There is no one magic formula ... with which the government debt crisis can be overcome in one go."

When Merkel returns from the summit, German lawmakers are to vote Friday on approving her cherished European budget-discipline pact and on the eurozone's permanent rescue fund.